Author: dev2host

The “Best Time” to Begin Collecting Social Security Retirement Benefits

By: David K. Carboni, Ph.D.,CFPⓇ

An increasingly important financial decision nearly every employee must eventually face: when’s the best time to begin collecting Social Security retirement benefits?

Not long ago, “conventional wisdom” was to begin collecting Social Security retirement benefits as soon as you became eligible at age 62, and not wait for a full, un-reduced benefit.” The thinking was that so few people would live into their 80s that it wasn’t worth the wait for a larger benefit.

So what’s the real story? Our parents (born in 1937 or earlier) received 20% less for collecting at 62 than had they waited to collect at their full retirement age of 65. Alan Greenspan extended Social Security’s full “un-reduced benefit retirement age” for anyone born after 1937. Those born between 1943 and 1954 get 25% less at age 62 than had they waited to receive their full benefit at 66 (new full retirement age). Those born in 1960 or later will receive 30% less at 62 and must wait until age 67 to receive an un-reduced Benefit. By doing the math, you’ll see that you must live 12 years beyond your full (un-reduced) retirement age to justify waiting to collect your full benefit. So what’s the smart move?

Most people approaching age 62 can’t imagine living into their 80s, and so they opt to collect Social Security benefits early. What they fail to realize is that a 65 year old has about an 80% chance of reaching age 80, with women even more likely to live well past 80. Therefore, from a “dollar and sense” standpoint, it’s better to wait to collect. Not only will you get a substantially higher benefit, but your cost of living increases will be bigger because they’ll be based on a higher benefit.

Selecting the best time to take Social Security is very important to ensure retirement income security, especially for lower and moderate income employees. In fact, according to a recent study, an employee with a $40,000-a-year salary a spouse who’s been marginally employed, Social Security benefits are worth nearly $600,000 for that couple at retirement. But taking the benefit “early,” they can significantly reduce the life-time value of their benefits.

There’s an even added advantage for waiting until age 70 to collect. For each year you delay collecting Social Security from you full retirement age until age 70, your rises by 8%. Not bad in a low interest rate environment where to receive an 8% return you must take substantial investment risk. Likewise, this strategy will result in higher widow’s benefit for a surviving spouse.

Bottom line: the decision to opt for a permanently reduced Social Security benefit at age 62 can have disastrous long-term financial consequences for employees, especially for women. Why women? Not only do women generally collect smaller Social Security checks than men because they have worked fewer years, but also because they live longer than men (a 65 year old woman has nearly an 50% chance of reaching age 89), women are more likely to feel the “pinch” of a permanently reduced check. So unless you’re in poor health, are desperate for income, or have more than enough income from other sources, consider waiting until you’re for a full, un-reduced Social Security retirement benefit.


Filed under: Musings-Articles, Uncategorized

Medicare Advantage Plans: An Alternative to Traditional Medicare

By: David K. Carboni, Ph.D.,CFPⓇ

Consumers enrolled in Medicare can buy Medicare Supplemental Insurance Plans to fill in the gaps Medicare leaves in co-pays and deductibles. These plans, along with a Medicare Prescription Drug plan (Plan D), provide Medicare recipients with significant health coverage. However, there is another alternative for health care coverage for those eligible for Medicare: Medicare Advantage Plans (MAP). With MAPs, insurance companies contract with the federal government to offer Medicare benefits through their own policies. They are different types of MAPs, including: Health Maintenance organizations (HMOs), Preferred Provider Organization (PPOs), Medicare Private Fee for Service (PFFS) plans, and others. Costs, extra benefits, and rules vary by plan. With MAPs there’s no need to buy a Medicare Supplemental Plan.

MAPs are required to provide the same services as traditional Medicare. But there are catches. First, they can do so in different amounts, that is, they can offer different co-pays, coinsurance, and deductibles for these services. With MAPs, you continue to pay Medicares Part B premiums ($144.60 in 2020), except for high incomes folks), and then (usually) pay an addition premium. MAPs commonly offer services Medicare does not, such as: vision coverage, health club memberships, and even dental care. Drug coverage is also common in MAPs. This eliminates the need to buy a separate Plan D prescription drug plan. In fact, the Center for Medicare Advocacy says it’s possible to have lower out-of-pocket costs with MAPs.

Never the less, there are serious caveats with MAPs. Some plans add benefits that may have little value (e.g., health club memberships), while paying less than traditional Medicare for hospital stays or nursing care. Hospitalizations and nursing care expenses represent the real financial risks you face later life. Unfortunately, MAP coverage limits can be obscure or be buried in footnotes not readily apparent. Therefore, it’s imperative to carefully scrutinize the deductibles and co-pays for doctor and hospital care and compare these with traditional Medicare (with Supplements).

Medicare Supplemental Plans used in concert with Traditional Medicare are portable, that is, a plan holder may receive care from any Medicare authorized provider. In contrast, MAPs typically run like HMOs or preferred provider organizations, with networks of providers. If you want the freedom to see any provider (or if your current providers don’t participate), you should probably not enroll in a MAP. Likewise, if you expect to travel a lot (or spend time outside the service area), you should likewise think twice before enrolling in a MAP. In the recent past, aggressively marketed MAP private fee for service (PFFS) plans were said to offer the freedom of choice of providers while providing the savings of MAPs. These freedoms can be illusory, as providers can refuse to accept patients in such plans, and recent legislation has further restricted their use.

MAPs present other problems as well. If your doctor leaves the plan during the year, you could be faced with higher medical charges, as he would then be considered an out of network provider. Your other choice would be to find a new in network doctor. Also, a serious illness could prompt you to seek care from non-participating specialists or hospitals. These could be at potentially much higher charges, or you may be forced to pay the entire cost of the covered service. So a MAP’s seemingly lower premium could come at the price of less flexibility in seeking and paying for needed care. Likewise, if you are on a prescription drug regimen, it’s a good idea to check the formularies (prescription drug protocols) offered by the MAPs you are considering. If a MAP charges significantly more for the drugs you require, the lower premiums may be offset by your higher out-of-pocket prescription costs.

You can join a MAP or other plans when you first become eligible for Medicare-called your initial enrollment period. You may also enroll during prescribed enrollment periods. Likewise, you may only switch plans during certain time periods. For example, each year an Annual Election Period (AEP) occurs from October 15 to December 7, and the plan you elect becomes effective January 1. MAP open enrollment periods (MA-OEP), Jan. 1 to March 31, are also available to allow you to switch plans. There are restrictions on what changes you’re allowed to make among plans during MA-OEPs. For example, you can’t add or drop Medicare prescription drug coverage during OEPs unless you already have Medicare prescription drug coverage. Refer to for other change limitations during MA-OEPs. In addition, there are special enrollment periods (SEPs) which allow consumers to switch MAPs if:

-they move out of the plans service area
-they move to an area that has new MAP or Plan D options available
-their plan leaves the Medicare program, and other special situations

Medicare websites tool: The Medicare Options Compare ( displays the MAPs in your area. By clicking on estimated annual cost, you receive out of pocket estimates based on your general medical condition. Two other excellent websites with tips for comparing plans are: Medicare Rights Center ( and Medicare News Watch ( This latter site also displays estimates of out-of-pocket estimates for MAP HMOs and MAP preferred provider organizations (PPOs). Your State Health Insurance Assistance Program (SHIP), easily accessed through, can provide access to health insurance counselors who can offer guidance on selecting MAPs available in your state.

Key: Currently, only four states (Maine, Massachusetts, Connecticut, and New York) allow you to switch from an Advantage Plan to a Medicare Supplemental Plan without demonstrating evidence of that you’re in good health. This could lead to a situation that if you develop a serious health issue you could be unable to seek out the best providers available for your condition if they are not in your MAP network. This suggests that Medicare Supplemental Plans are nearly always a better choice than MAPs unless you are simply unable to afford what may be a higher premium of a traditional Supplemental Plan, or you live in the Northeastern states mentioned earlier.

As with many areas of financial planning and retirement planning, retire health care planning is a dynamically changing. Health care and how its financed remains a major challenge facing the USA, and new plans and approaches will no doubt emerge. Therefore, you must remain informed on this changing landscape as you plan for your health care needs in retirement.

– 4/20/2020

Filed under: Musings-Articles, Uncategorized

Credit Scores: Myth versus Reality

By: David K. Carboni, Ph.D.,CFPⓇ

Credit scores are increasingly important to our financial lives and yet many of us don’t realize it. Our financial transactions are closely monitored by the credit bureaus and used to determine our credit risk, otherwise known as our credit score.

A credit score affects how much interest we pay on mortgages, consumer loans, credit cards and more. The difference between a good score and a bad one can be tens or even hundreds of thousands of dollars over our adult lives. A credit score can also affect your ability to get a job, a cell phone contract, rent an apartment, or even how much we pay for insurance.

All of us must becoming an educated consumer about our credit score. A bad credit score can block you from buying a home or a car, or finding a job.And yet, the credit scoring system seems such a mystery because there’s so much confusing information out there (bad and good) that it’s hard to sort whats real from the myths.

Facts about Credit Scores:
1. All credit scores are not created equal.
2. Pay attention to the credit score called the FICO score.

Major lenders use the FICO score and about 90% of the top 100 financial institutions in the U.S. The score, based on a formula developed by the Fair Isaac Corporation, is the gold standard for measuring credit risk. FICO scores range from 300 to 850, the higher the better

The best place to get our FICO score is directly from the company at If you have applied for a loan your lender can give it to you. Under federal legislation, every credit bureau is required to give consumers one free credit report per year (visit, but not a free credit score. The major credit bureaus sell credit scores based on their own models. The closest to FICO of the three is Equifax.

Check Your Credit Score
Lenders will obtain your FICO score which rely on the credit reports from each of the big three bureaus. Your credit reports may vary somewhat with each bureau as they may not have identical data. Also, 85% of credit reports have errors, with many serious enough to affect your credit score. Unless you find these errors and take action to remove them from your credit reports, they will remain there.

That’s why its wise to check your credit reports annually because you never know when you might have to borrow money and it’s best to be prepared. If you aim to buy a house in the near future, its vital. By the way, it can take months to raise your credit score.

For most of us, buying a home is the most expensive purchase we will ever make. Getting a preferred interest rate will make a huge difference over the mortgages life. Heres an example from a year ago that shows how a credit score impacted the interest rate available on a 30-year fixed rate mortgage:

Credit Score

Interest Rate
4.500% (options are very limited for people with scores in this range)

4.750% (and likely not able to be done)

Other Impacts of Your Credit Score
To get the best terms from a credit card company, you need a high credit score. Likewise, a bad credit score can get you turned down from renting an apartment or force you to pay more money up front to the landlord. Now, only seven states restrict the use of credit scores to screen job applicants. States that restrict this practice are: California, Hawaii, Oregon, Connecticut, Illinois, Maryland and Washington.
In addition to credit card records, consumer loan and mortgage payments, and collections, charge-offs and bankruptcies are also tracked by the major credit bureaus. Many of our financial dealings that used to go under the radar are now being captured by a fourth credit bureau: CoreLogic. CoreLogic tracks evictions, child support payments, payday loan applications and property tax liens. It’s being offered to mortgage and home equity lenders to screen applicants for credit risk.

How do you maintain a good credit score? The single greatest factor is payment history, which makes up 35 percent of a credit score. So pay your bills on time. The amount of debt you have is the next most important factor, making up 30 percent of a credit score. Work to keep credit balances at zero. But if that’s not possible try to keep the balance owed at no more than 30 percent of whats available.

The other factors include length of credit history, which makes up15 percent of your credit score, types of credit (10 percent), and inquiries for new credit (also 10 percent).

A few pitfalls to avoid include:

Don’t close an inactive credit card account as it could raise your overall debt-to-credit ratio and lower your credit score.
Don’t co-sign a loan unless you are prepared to risk lowering your credit score should the other person default.
Don’t max out or exceed credit card limits.
Understanding and tracking your credit score doesn’t have to be difficult. But it can reap great rewards for your financial life.

– 1/22/2015

Filed under: Musings-Articles, Uncategorized

Having the Uncomfortable Conversation

By: David K. Carboni, Ph.D.,CFPⓇ

You may remember the television commercial about how important is to have your cars oil changed regularly. It went something like this, Pay me now, or pay me later. We all knew what they were getting at: either pay attention to what needs to be done today, or you’ll have to deal with the consequences later. The same message applies to the uncomfortable conversation with your parents (or older relatives) on the need for an up-to-date estate plan. Without such a plan in place, the responsibility could fall to you to make difficult decisions when your parents die or become incapacitated. Making those decisions can be doubly difficult if you dont know what their intentions were.

For some families discussing these matters can be threatening. Parents may question the need for such a conversation. It may prompt fears over their loss of independence, incapacity, or eventual demise. Or, they may feel that its none of their childrens business, or even worse, that their children just want their money. Children may be reluctant to initiate the conversation because they may feel as if theyre challenging their parents traditional authority or that they are violating their privacy. Therefore, tact, patience, and persistence are keys to successful conversations.

You’ll first need to discuss what they would like to happen if they were to become incapacitated or die. Once you identify their intentions, its simply a matter of making sure the appropriate documents are in place to carry out their aims.

A good estate plan will ensure that your parents property goes to the right people, at the right time, and in the right form, while minimizing taxes and administrative expenses. Also, theyll need documents to authorize others to act on their behalf in financial and health care matters if they become incapacitated.

Legal documents to accomplish these things will include an up-to-date will. Also known as a last will and testament, a will directs property the will maker owns solely in his or her name at death. If your parents already have wills, they should consider updating them if they:

– bought a new life insurance policy
– bought a time share
– moved to another state
– bought real estate in another state
– want to name a new executor
– got a divorce
– got married (or remarried)
– became estranged from a beneficiary
– had a change in health or that of a changed
– had a birth or death in the family
– 1/20/2015

Filed under: Musings-Articles, Uncategorized

Saver’s Tax Credit Helps Lower Income Employees Save for Retirement

By: David K. Carboni, Ph.D.,CFPⓇ

Saving for retirement is a daunting task for anyone, but its particularly challenging for lower income employees. One provision of the Tax Code, however, can make it a little easier. Its called the “Savers Tax Credit.” Originally added to the tax code in 2002 as a temporary provision, it became permanent in 2006. For 2011, the Savers Tax Credit is available to employees whose modified adjusted gross income is below $28,250 for Single tax filers, $56,500 for couples and $43,125 for Heads of Household. In 2012, the income limits will rise to $28,750 for singles, $57,700 for couples and $43,125 for Heads of Household.

If eligible, the Savers Tax Credit allows the first $2,000 an employee contributes to an IRA, 403b Plan, 401k Plan, or similar workplace retirement account, to count towards the savers tax credit. As a reminder, a tax credit is a dollar for dollar reduction of your tax bill. The credit can be used to increase your refund or reduce the tax you owe. The potential amount of the credit varies and is based on your income and filing status. Never the less, the credit itself can be as large as $1000 for employees (50% of the $2000 amount you contribute to employer’sRetirement Plan, or to an IRA). For eligibleemployees, the savers tax credits benefit is in addition to the tax deferral you receive from making a contribution toyouremployer’sRetirement Plan or IRA.

Unfortunately, awareness of the provision has remained low. Millions of lower income Americans dont know of this opportunity to help them save for retirement. In fact, a recent Transamerica Center for Retirement Studies online survey of 4,080 employees age 18 and older, found that only 21% of people earning less than $50,000 said they knew of the Savers Credit. Thats up from 12% in 2010. Hopefully, this article will reachthose employees who may be eligible.

Employees interested in obtaining the tax credit in 2011 must have made a contribution toemployer’s retirement planby the end of the 2011 calendar year. However, you have until April 17, 2012 to make contributions to an IRA to get the credit for 2011.

For nearly all Americans, making contributions to employer retirement plans or IRAs is the key to a secure retirement. If youre eligible, dont overlook the opportunity provided by Savers Tax Credit to help you fund your retirement.

– 1/3/2012

Filed under: Musings-Articles, Uncategorized

American Opportunity Tax Credit Offers Help for College Expenses

By: David K. Carboni, Ph.D.,CFPⓇ

After funding your retirement, paying for the kids’ college educations is the number one financial challenge most families face. Luckily, a recently passed tax law has suddenly made college tuition less expensive for millions of Americans. This article focuses on tax breaks available to families as a result this legislation recently passed by the Obama administration. The centerpiece of the tax break for families is the American Opportunity Tax Credit (AOTC) passed as part of the American Recovery and Reinvestment Act of 2009. The AOTC made college more affordable for millions of students and their families in 2009 and 2010. To continue making higher education more affordable for millions of students, President Obama extended the AOTC to years 2011 and 2012 as part of the Tax Relief Unemployment Reauthorization and Job Creation Act of 2010.

As a reminder, a “tax credit” is a dollar for dollar reduction of your tax bill. For most people it’s much more valuable than a “tax deduction” which is simply a reduction in the amount of your income subject to taxation.

The reauthorized law allows families with tuition expenses to obtain a tax credit of up to $2,500 each year for up to four years per student, with up to $1,000 of the credit being refundable. The credit is 100% of the first $2,000 of college expenses, and 25% of the remaining expenses, up to a total credit of $2,500. A “refundable tax credit” means that a family could receive back more than they actually paid in taxes if their college expenses exceeded their total federal income tax bill. For example, if a family otherwise owed $1,500 in federal taxes and was eligible for a $2,500 AOTC, they would get a tax credit against the $1,500 they would have paid in taxes, thereby eliminating their tax bill. In addition, they would receive an additional $1,000 “refund” from the IRS in the form of a “refundable tax credit.”

The AOTC replaces and improves the Hope Credit by increasing the amount of the credit by $700. In addition, unlike the Hope Credit, which allowed students to apply it to the first two years of college, the AOTC applies to the first four years of college. Third and fourth year students receive significantly larger benefits under the AOTC, making it more likely that they will be able to continue their educations. Furthermore, more families are eligible for the AOTC because income limits were expanded compared to the Hope Credit. Families with Adjusted Gross Income below $160,000, and single filers whose AGI is below $80,000 are eligible for the full credit. The credit gradually “phases out” (i.e., is reduced) for families with AGI’s above these levels and cannot be claimed for taxpayers with an AGI greater than $90,000 (greater than $180,000 for joint filers). Likewise, the AOTC covers textbooks, a significant expense for a typical college student, which the Hope Credit failed to cover.

By the way, as a practical matter, the AOTC is claimed by using Form 8863 and attaching it to your main tax return.

For nearly all Americans, completing higher education can be a “ticket to the middle class.” Don’t overlook the opportunity provided by AOTC which can be an important tool to help you and your family complete this journey.

– 10/3/2011

Filed under: Musings-Articles, Uncategorized

A Financial Checklist to Keep Your Finances on Track

By: David K. Carboni, Ph.D.,CFPⓇ

Before major airlines allow flights to depart, their pilots must complete a thorough and systematic checklist. Not only is this good aeronautical practice, it’s also an excellent way to avoid problems before they arise. Likewise, employees should periodically complete the Financial Checklist below make sure your finances are in good order.

□ Create or Update Your Will. Review your will to make sure: it reflects any changes in your wishes; incorporates additional assets you may have recently acquired; confirms your choice of executor; incorporates any changes in the family (births, deaths, divorces, etc.); incorporates new tax laws (federal and state); and deals with real property you may have purchased, especially out of state real estate.

□ Create or Update Your Letter of Instruction. This document, which should accompany the will, is designed to speak for you as if you were still living. Here you put instructions not easily included in the will, such as: burial instructions; your various accounts, including passwords and pin numbers; contact information of advisors, attorneys, relevant family members, executors, employer benefits personnel, etc.; safety deposit and key locations; location of important documents, including: life insurance policies, deeds to real estate, and the original will.

□ Create or Update Your Advance Directives. These documents authorize others to act in your behalf if you become incapacitated. The holder of your Durable Power of Attorney makes legal and financial decisions for you; the holder of your Health Care Proxy makes health care decisions for you and carries out your “end of life wishes” as you’ve expressed them in your Living Will. Make sure all these documents comply with rules on protecting medical information (HIPPA) so that your agents can make informed decisions.

□ Review Your Beneficiary Designations. As the years pass, it’s important to make sure the named beneficiaries of your various accounts are current. These accounts include: you and your partner’s company savings plans; your life insurance policies, including group plans at work; your IRAs, among others. Too often proceeds have gone to ex-spouses or to reimburse the state for a parent’s nursing home care because employees/retirees forgot to update their beneficiaries.

□ Calculate if You’re on Track to Afford to Retire. Though hard to believe, 44% of Americans retire today without identifying if they can afford to. Companies’ 401k or 403b providers, often have excellent, no cost calculators available at to help you with this task. Employees can also access Fidelity Investments excellent calculator at and look for the “Retirement Income Calculator.” Though no calculator can foresee all circumstances, attempting to figure out if you’re on track can be an eye-opening experience to motivate you to get more serious about your retirement planning.

□ Contact Social Security to confirm Your Benefit Amount. Nothing beats contacting Social Security directly at ( or at 1-800-772-1213) to confirm what your monthly benefit will be. While everyone receives an Annual Statement, contacting Social Security directly will provide a much more accurate projection. Likewise, you’ll discover which documents you’ll need to apply for benefits.
– 8/2/2011

Filed under: Musings-Articles, Uncategorized

Challenges Women Face Planning for Retirement

By: David K. Carboni, Ph.D.,CFPⓇ

According to a recent study by the Society of Actuaries (SOA), women face special risks in retirement. The study, The Impact of Retirement Risk on Women, suggests that an overwhelming majority of women have a very poor understanding of their own longevity and what it will take to support that longer life-span. Olivia S. Mitchell, Professor of Insurance and Risk Management at the Wharton School, University of Pennsylvania, indicates that one of the reasons that many women are unprepared for retirement is that people, in general, have a very low level of financial literacy.

According to the SOA study, the risks women face in retirement from an actuarial standpoint differ considerably from those facing men. According to the study, the five key issues that women face and fail to adequately plan for include:

►Outliving their assets

►Widowhood’s financial challenges (as well as emotional)

►Potential for Chronic Disability, either mental or physical

►Cost of health care

►Economic Factors

Many of these issues occur because women tend to outlive men and because older women are much more likely to be widowed than men. On average, a 65 year old woman can expect to live into her 80s, with many living well into their 90s. In contrast, a typical 65 year old man can expect to live about 17 more years, with far fewer surviving into their 90s. Also, widowhood falls disproportionately upon older women. Over 85% of women age 85 or older are widowed, while only 45% of men over 85 are. Because traditionally women have been younger than their husbands, and, along with their longer life expectancies, women can experience widowhood for periods exceeding 15 years or more. For many women, the loss of a spouse comes with a decline in standard of living. Of women over 65 living alone, 40% depend on Social Security for virtually all their income.

At first glance these numbers can be intimidating. The good news is that there are resources and tools to help many female (as well as male) employees with the tasks. For example, eligible employees can make “pre-tax” contributions to company sponsored 401k and 403b Tax Deferred Savings Plan. Many employers also match employee contributions.

These plans grows tax-deferred until you make withdrawals from the account in retirement. Tax deferral allows funds that would have been lost in taxes today to compound for your benefit. In addition, when you withdraw these funds in retirement, you will likely be in a lower tax bracket, further reducing the tax bite on these funds. While employees then have the responsibility for managing the investments in their tax-deferred savings plans, most plan sponsors provides a variety of tools to help.

Many employees often overlook the opportunity of saving “just a little bit more” for retirement. The Table Below shows the impact that “saving a little more” can have on the amount you can accumulate at age 65. (The Table assumes a 7% annual rate of investment return).

Age Employee 401k Contributions Begin

Contributes $100 more a month

Contributes $200 more a month

Contributes $300 more a month

















As mentioned earlier, another retirement challenge women face is the risk of outliving their assets. With traditional pension plans (that guarantee a life-time income) less common, women must confront the possibility of living longer than their nest egg can support. One way to manage this risk is to convert a portion of one’s assets to a life time income (i.e., “annuitizing” the asset). Only insurance companies (through payout annuities) can offer this guarantee to pay you a set amount of income beginning at a pre-set date. Generally, once the payments begin, they will continue for the rest of your life, regardless of how long you live. In most cases, the payout amount will depend upon how much money you annuitize, your age when the payments begin, and the level of interest rates at the time you annuitize.*

*There are many different types of payout annuities and they will be the topic of a future article.


– 7/28/2011

Filed under: Musings-Articles, Uncategorized

What to Know About Coverdell Education Savings Accounts

By: David K. Carboni, Ph.D.,CFPⓇ

Consumers have had an excellent opportunity to help pay for their children’s educational expenses by contributing up to $2,000 a year to Coverdell Education Savings Accounts. Contributions, though not tax deductible, grow tax deferred and withdrawals to pay for qualified educational expenses from kindergarten through college have been tax free. Covered expenses have included: tuition, room and board, computers, extended day programs, academic tutoring, equipment, uniforms, and transportation. However, starting next year, withdrawals to pay for educational expenses incurred from kindergarten through 12th grade will no longer be tax free unless Congress extends the benefit (which is in doubt). Consumers who have relied on Coverdell Accounts to pay for pre-College educational expenses need to be aware of this potential glitch before making this year’s contribution. Another possible rule change would reduce the annual contribution limit back to $500 starting next year. Likewise, prospects in Congress for preserving the $2,000 annual limit remain uncertain.

Individuals with modified adjusted gross income below $95,000 are eligible to make the maximum annual contribution of $2000, while the limit for joint filers is $190,000. Eligibility for the maximum annual contribution gradually shrinks to zero for individuals with modified adjusted incomes between $95,000 and $110,000, and for joint filers with modified adjusted gross incomes between $190,000 and $220,000. To avoid these income restrictions, a child can use money received as a gift to make his own contribution to a Coverdell Account. The impact on financial aid is identical to the effect of contributions made in a parent’s name. Never the less, regardless of who makes the contribution, the annual maximum is $2,000 per child.

There are a number of other restrictions with Coverdell Accounts. First, beneficiaries of the accounts must be under age 18 when contributions are made, and the money can only be used for the beneficiary. Second, no refunds are available to the person who initiates the account. Third, if the beneficiary reaches age 30 without using the money, it will be distributed to the beneficiary and become taxable. However, the person who set up the account can change the beneficiary at any time to another family member under age 30.

Contributors to Coverdell Accounts can select their own investments. Unlike 529 College Savings Plans which limit investor choices to a limited menu of investments, the only investment prohibited for Coverdell accounts is life insurance. Never the less, financial institutions that offer Coverdell accounts can set their own investment restrictions. For example, Charles Schwab Investments does not allow risky and often illiquid investments such as coins and antiques. Schwab also disallows other exotic investments like futures contracts and other financial derivatives from Coverdell accounts.

Again, unlike 529 College Savings Plans that limit changing investments to once a year, Coverdell contributors can switch among investments as often as they like. Though switching investments often can be costly, it’s a nice option to have. Speaking of costs, be careful of firms’ set up charges to set up and annual fees to maintain an account. With Coverdell accounts’ relatively low contribution limits, even a modest $25 annual fee can cut deeply into returns.

– 7/24/2011

Filed under: Musings-Articles, Uncategorized

Perhaps You’ll Be Able to Retire After All

By: David K. Carboni, Ph.D.,CFPⓇ

We’ve all seen advertisements on TV suggesting you need $2 million dollars (or more) to retire comfortably. With day-to-day family expenses pressing, its easy to get discouraged when planning for retirement. Yet, if you look at “retirement” differently, the future may not look so bleak.

A few years ago Fred Brock wrote a provocative book, Retire on Less Than You Think (NY: Henry Holt & Co., 2004). Rather than lament the possibility of never being able to retire, he offered people some practical strategies to afford “retirement” without enduring too much pain and deprivation. The “watchword” of his message is flexibility on what retirement can mean to you. Ive listed below are suggestions to consider to make retirement affordable.

□ Plan to work in retirement…at least part time. This may include staying in your primary career (or job) longer than you had planned. Though some people may feel “cheated” if they have to work longer than planned, increasing numbers of people are recognizing the benefits of working in retirement.” These include: retaining lower cost group health insurance coverage until at least 65 when eligibility for Medicare begins; delaying making withdrawals from portfolios to meet every day expenses; saving more for retirement; staying engaged socially; keeping minds active, not to mention the benefits of having some time apart from partners, or as the bumper sticker reads, “retirement: not enough money and too much spouse!”.

□ Separate “necessary expenses from “nice to have” expenses. Many people have never sat down and seriously figured what its really “costing them to live.” When you remove the extras, your basic expenses may be far less than you imagined. Though “the extras” can be what makes life worth living, it can be reassuring to know that you could cut back without dramatically reducing your life style. This exercise can also be a good way to distinguish between activities you really enjoy from those which you do by habit. Knowing “your necessary expenses” can also help you more accurately calculate your retirement income needs.

□ Delay Collecting Social Security. In 1984, an Alan Greenspan led committee gradually increased the eligibility to collect a full Social Security benefit (known as your “Full Retirement Age”) from age 65 to age 67. The committee simultaneously increased the permanent penalty (in reduced benefits) for collecting “early” at age 62. Therefore, with people living longer, it has become increasingly important to delay collecting benefits to maximize your Social Security benefits. Furthermore, Social Security provides extremely generous “delayed retirement benefits” if you postpone collecting until age 70. This “enhanced” benefit (in some cases nearly 70% higher than your age 62 benefit) not only enables you to receive larger annual costs of living increases, but also can significant increase the survivor benefit your spouse could collect if you die first.

□ Consider Relocating. Most of us already know that Southern New England is among the costliest areas to live in the USA. Therefore, it only makes sense to consider relocating to a less expensive area. Not only will your dollar “stretch” further elsewhere, but seven states (Alaska, Nevada, South Dakota, Wyoming, Florida, Texas, and Washington) levy no state incometaxes. Furthermore, 75% of all states (unlike Connecticut) exempt Social Security benefits from state incometaxes. Many areas are 30% less expensive to live for the typical retiree, so it certainly makes sense to consider moving. A special capital gains tax exemption against federal incometax is also available if you sell your primary residence ($500,000 for married couples filing jointly and $250,000 for single filers). Likewise, recent legislation allows you to immediately buy a home elsewhere and take out a reverse mortgage on the new primary residence to supplement your income.

□ Consider Annuitizing Some of Your Assets. One of the biggest concerns many have is the fear of “outliving their money.” This results in some retirees needlessly scrimping to protect against the possibility of “living too long,” while others withdraw too much too soon from their portfolios and face the possibility of fully depleting it (while theyre still living and need income). One way to protect yourself from this dilemma is to convert a portion of your portfolio into a life-time income. You do this with a “payout annuity” by a process called “annuitizing.” In most cases, you cannot outlive this income. Just as life insurance protects your family from your dying “too soon,” a payout annuity protects you against “living too long.” Along with the income Social Security provides, you could annuitize just enough of your nest egg to meet your basic expenses. The remainder of your portfolio you can invest to draw from later to pay for discretionary expenses and to protect you against inflation.

– 7/24/2011

Filed under: Musings-Articles, Uncategorized

Funding Your Kids’ College Education(s)… Are you ready?

By: David K. Carboni, Ph.D.,CFPⓇ

After funding your retirement, underwriting your childrens college educations is the single, largest expense most families face. Never the less, its important to make sure youre on track for a financially secure retirement before looking to fund the kids college. That said, there are a number of ways to approach the daunting task of college funding. Before you get intimidated about the high price of college, its important to keep a few facts in mind. On average, four-year state colleges charge $7,020 annually for tuition and fees for students who live in state, according to College Boards website. Private colleges charge $26,273, while two-colleges average $2,544 in tuition and fees. Obviously, thats not the total bill because you must include room and board. College Boards website, offers some helpful ways to estimate these additional costs. So your first step is to estimate the total cost of college.

Its important to break down costs between direct billable costs, such as: tuition, fees, and room and board. Tuition and fees can vary by academic program and whether you child attends full or part-time. Also, room and board charges usually vary by the meal plan and room your child selects. If your child lives off-campus or at home, dont forget to estimate these costs as well. Many so-called “indirect” college costs include: books, supplies, travel, and personal items. To get an idea of these costs, national figures indicate that the average four-year undergraduate student in 2009-10 spent $1,122 on course materials and $1,974 on personal expenses such as laundry, cell phones, etc., and $1,079 on transportation expenses. Savvy students can make wise choices to avoid over spending on these items.

Its also encouraging to realize that most students receive financial aid. College Board reminds us that the average amount of aid for a full-time undergraduate student is approximately $10,000, with more than half coming from grants that dont need to be repaid. Even students from well off families can receive financial aid. For example, 40% of students at Brown University receive financial aid, with the typical package around $31,000. Some of those students come from families with incomes exceeding $200,000. Therefore, dont assume you dont qualify for financial aid if your family income is relatively high.

The first step in applying for financial aid is for parents to complete the Free Application for Federal Student Aid (or FAFSA) which determines the students eligibility for financial aid (i.e., Pell Grants, Stafford Loans and Perkins Loans). The process considers the applicants “available income” which generally includes most taxed and untaxed income, but excludes sometax credits such as the “earned incometax credit.” FAFSA puts your familys financial information into a central data base for federal, state, and university-provided aid. You can find a FAFSA form at

Generally, as part of applying for financial aid, FAFSA assesses parent owned assets at a rate of 5.64% in determining a familys expected family contribution (EFC) toward college expenses. Student owned assets are assessedata 35% rate for EFC. Therefore, its generally a good idea to keep assets out of the students name when applying for financial aid. The FAFSA considers the “base year” the year prior to awarding financial when they examine a familys assets and income. Therefore, its also wise to defer income and “load up on” tax deductions during your “base year”, as both income and assets play a significant role in determining your eligibility for financial aid. Assets in 403b and IRA accounts are generally not counted in determining your EFC because they are considered “inaccessible.” So you could have a situation where a modest income family with college earmarked assets in its childs name could qualify for less financial aid than a higher income family with most of its assets in retirement plans. Know these rules and plan accordingly. Also, be aware that competition for financial aid is intense, with FAFSA applications up more than 20% this year.

Experts also agree that you shouldnt be shy about trying to negotiate with financial aid offices. Some people have even try to play one schools financial aid office against another, by letting their preferred choice school know what others are offering. But be careful not to alienate financial aid officials by being too aggressive.

Under the financial aid provisions of the recently passed Health Care and Education law, beginning in 2011 students and parents will be able to borrow for higher education directly from the federal government. Parents borrowing interest rates will fall from 8.5% to 7.9% (PLUS loans) under the new program. Parent borrowers need a better credit record than students and parents cant have any missed payments in the last 90 days or declared bankruptcy or had a foreclosure in the last five years. The law also provides more funding for Pell grants, available for students from families making less than $50,000. Publishers of suggest that total education debt should not exceed what students expect to earn in their first year out of college.

As another option, parents should compare the rates for a home equity loan before taking out a private education loan. While a home equity loan can put the borrowers house at risk, interest rates on these loans can be low and the interest may be tax deductible.

In summary, fund your own retirement before funding your childrens college education. But when planning to pay for the kids college: know the rules, plan early, know your options, and be persistent. Your childrens college education could depend on it.

– 10/24/2010

Filed under: Musings-Articles, Uncategorized

Long-term Care Insurance: What is It? Do I Need It?

By: David K. Carboni, Ph.D.,CFPⓇ

Long-term care (LTC) expenses are among the most little known, but possibly among the most devastating potential threats to most retirees’ financial security. The likelihood of needing LTC is greater than most people think. Recent studied indicate that there’s approximately a 50% of someone needing LTC at some point in their lives. Currently, 9 million people receive LTC and 85% of those individuals live in the community, and 40% of them are under age 65. 75% of those receiving LTC need it for a year or more, with 30% needing it for more than 5 years.

LTC expenses can be considerable. Most recent data in CT indicate that the cost of basic LTC provided in a nursing home exceeds $114,000 a year, with many of the higher priced facilities charging considerably more. Such care provided today in an Assisted Living Facility in CT averages approximately $40,000 per year, with a significant number of facilities charging much more. LTC provided at home costs less, unless “round the clock” care is needed.

LTC refers the care provided to help a person needing assistance with at least 2 out of 6 Activities of Daily Living (ADLs) for at least 90 days. ADLs include:

Transferring from the Chair to the Bed
The inability of the insured to perform these ADLs (as certified by a physician) triggers the payment of Long Term Care Insurance (LTCI) benefits.* LTC can be:

Nursing Home care
Care provided in an Assisted Living Facility
Care provided in an Adult Day Care Facility
Home Health Care
Personal Care (at home)
Respite Care
Neither Medicare nor Medicare Supplemental insurance plans (including Medicare Advantage Plans) cover long-term care expenses. Though each pays for a limited amount of rehabilitation care provided in a nursing home or at home, neither pays for LTC.

LTCI is designed to transfer the risk of incurring significant (LTC) expenses from an individual to an insurance company. Though LTCI has been around for over thirty years, over the last 10 years policies have improved significantly and gained increasing public awareness. None the less, only a small fraction of those who may one day need LTC have purchased a plan.

LTCI has a number of key features important to understand. First, plans are “medically underwritten.” This means you must be relatively

*Even if the insured can technically perform these tasks, cognitive impairment requiring substantial supervision can also trigger benefits

healthy to be eligible to buy a LTCI policy.* Second, plan premiums are “age-based,” that is, the older you are at the date of purchase, the higher the premium. Once you buy a plan premiums are expected to remain level. However, the insurance company can petition the state to allow them to raise premiums if they can demonstrate that “it’s necessary”. Therefore, when you shop for a plan find out how often a company has raised premiums in the past. It may be a sign that the company has underpriced its products and will raise premiums again.

You generally buy LTCI in increments of daily benefit amounts (DBAs) which can range from $50-$500 per day for care in a facility, with home care coverage a percentage of the full DBA. The plans also have “elimination periods.” This refers to the time period when you first receive LTC that you must pay for it yourself. For example, if your plan had an elimination period of 90 days, you’d pay for the first 90 days of care, and then your plan would begin paying benefits for care you receive after 90 days. Elimination periods typically range from 0 to 180 days. LTCI policies also have payout periods: the length of time the plan pays benefits. These can range from as little as one year to “your life-time.” Another important option is an inflation rider. This can add significantly to the cost of a plan, but it’s a must as it allows your benefits to rise with inflation.

*Occasionally, group LTCI plans offered through an employer will waive this requirement briefly during an initial open enrollment period.

The price of LTCI plans vary considerably and reflect:

Your Age at purchase date
the amount of the DBA you select
the length of the elimination period you elect
the length of your payout period, and
the presence (or absence) of an inflation rider
A “typical” LTCI policy’s annual premium can run $800 a year if purchasedatage 45; $2,300 if bought at age 55; $3,800 at age 65; and $7,500 at age 75, and so on. So it behooves the consumer to consider buying LTCI at a younger age at a lower price. Likewise, this strategy avoids the possibility of later developing health problems and thereby becoming uninsurable. Some argue that buying a plan at a younger age has the consumer paying premiums for many more years and making the plan more costly. None the less, it’s important to bear in mind that 40% of people receiving LTC are under age 65, and group health insurance plans rarely pay for LTC.

LTCI experts suggest you seriously consider buying LTCI if a number of the following apply:

you have financial assets (excluding your house) greater than $300,000
can afford the premiums (now and in the future)
want to be in control of the LTC you receive
do not want to be a burden to your family
want to leave an estate
already are saving enough to be on track to afford to retire
In reality, LTCI is should be viewed as a way to protect your retirement’s financial security (and your partner’s). As mentioned, LTC expenses are among the most significant expenses that can threaten your future. LTCI allows you to protect your retirement income and assets by transferring the risk of significant LTC expenses from your shoulders to that of an insurance company. Just as few home owners are without home owner’s insurance, most employees should not ignore the risk posed by LTC expenses.

– 10/24/2010

Filed under: Musings-Articles, Uncategorized

Monte Carlo Simulations: What Are Their Limits?

By: David K. Carboni, Ph.D.,CFPⓇ

In the last decade or so, a “Monte Carlo simulation” became the “gold standard” of retirement planning assistance. Named after the European gambling center, this calculation projects the odds of attaining your retirement financial goals. Unfortunately, Monte Carlo simulations (MCSs) don’t generally include scenarios like the recent stock market meltdown. Though the method runs portfolios through hundreds (or even thousands) of market situations, they assign very low odds to extreme market events. Unfortunately, these so-called “Black Swan events” appear to be happening all too frequently. So how much credence should some one planning for retirement give to MCSs?

To answer this question let’s consider how simulations work. Though there’s no uniform approach, a good simulation typically has you enter information on: your age, retirement date, assets, asset mix, income goals, annual contributions toward retirement, retirement income sources, and other details. The calculating program then runs hundreds (or again, even thousands) of market scenarios based on past market performance. It incorporates assumptions on long-term expected investment returns, market volatility, inflation, and other factors. The resulting calculation provides a “rate of success,” that is, what percentage of expected market scenarios allows you to support your retirement income goals.

It’s important to recognize that MCSs represent a significant improvement over past retirement planning approaches which simply assigned a set return to an asset class and assumed consistent performance every year. However, critics argue that MCSs are hardly a panacea because they fail to incorporate scenarios like the recent stock market swoon. In fact, William Bernstein, author of “The Four Pillars of Investing,” was quoted in the Wall Street Journal recently as saying, “just add 20 percentage points to the probability of failure your MCS predicts, and you’ll be O.K.” Others complain that different MCS calculators do not make the same assumptions about interest rates, inflation, and market gyrations. Also, many MCSs assume that market returns reflect a “bell-shaped” distribution. This means that the likelihood of a 6% market return (toward the middle of the curve) would be dramatically higher than the likelihood of an extreme return (e.g., a 50% loss occurring at the extreme end of the curve). MCS proponents argue that it should be that way because extreme returns are just that: extreme and infrequent.

It’s important to recognize that some MCS models are better than others. For example, the one used by the firm, Financial Engines, assumes much higher odds of extreme returns than would be expected by a bell-shaped curve. Likewise, Morngingstar has modified to its MCS model to allow its clients to assume returns that fall along a “bell shaped curve,” or to select a model which presumes higher likelihoods of more extreme market behavior. Other firms are considering similar modifications to their MCS models.

How much should you rely on MSCs to help you figure out if you can afford to retire? First, recognize that a MCS is one tool among many to help you answer this question. Regardless of improvements to MCSs, no methodology will ever be able to accurately predict very infrequent events. This means that every retirement plan should have enough flexibility to respond to unpredictable occurrences that will inevitably happen. This could mean being open to working part-time, especially during your retirement’s early years. You could also gradually convert some or all of your assets to guaranteed life-time incomes (annuitizing) as discussed in earlier articles. Delaying the collection of Social Security Benefits until you reach your full retirement age could be another prudent strategy. And finally, you could separate your retirement expenses into categories of “must haves” versus “would like to haves,” to identify an acceptable fall back life-style if extreme market events happen.

As far as using Monte Carlo simulations, follow the recommendation of the Retirement Income Industry Association to only use MSCs that run tens of thousands (and preferably, hundreds of thousands) of scenarios. Currently, some MCS projections rely on as little as one thousand scenarios for their depictions. Larger numbers of simulations include more extreme events in their runs and reduce the possibility of relying on an overly rosy investment scenario for your retirement projections. Check with the MCS sponsor you use to make certain that they adhere to the Retirement Income Industry Association recommendation. As with most things, your retirement plan should be prudent and flexible to respond to “unhappy surprises” ignored by less than robust MCSs.

– 10/24/2010

Filed under: Musings-Articles, Uncategorized

What You Should Know About 529 Education Savings Plans

By: David K. Carboni, Ph.D.,CFPⓇ

529 Plans are tax advantaged education savings plans run by states or educational institutions to help families save for college. With employees trying to balance saving for retirement with funding the kids college educations, it’s important to understand how 529 Plans work. Around since 1996, earnings from 529 plans can be used to pay the costs of qualified colleges nationwide. Unlike Coverdell Education Savings Accounts, there are no income restrictions on who may contribute to 529 Plans. Though contributions are not tax deductible for federal incometax purposes, an account’s growth and distributions are tax-free as long as they’re used to pay for qualified higher education expenses. Qualified expenses include: Tuition, fees, books, supplies, computer technology and special needs; room and board for minimum half-time students. There are no maximum contribution amounts, though some plans have set their own limits.

A number of states consider contributions tax deductible for state incometaxes as long as the contributions are to the in-state plan. For example, in Connecticut an individual may deduct up to $5,000 per year, with married couples filing jointly eligible to deduct up to $10,000 per year, for contributions into CT’s plan.

Generally, your choice of college is unaffected by the state sponsoring your plan. For example, you could be a Connecticut resident, invest in a Utah 529 Plan, to pay for the student’s expenses in a school in South Carolina. Though every state now offers a 529 Plan, not all offer the same kinds of plans. Essentially, there are two types of 529 Plans:

►Pre-paid plans allow you to pay all or part of the costs of an in-state qualified college. These plans may be converted to pay for private and out-of-state colleges. A separate pre-paid college plan for private colleges is called the Independent 529 Plan.

► Savings Plans are like 403b Plans or IRAs where your funds are invested in mutual funds or similar investments. Plans allow you to choose from among investment options. How much your plan grows will depend of how well your selected investments perform.

A 529 Plan feature particularly attractive to parents of college students is that the account-owning parent is able to change the beneficiary to another family member (including the account owner) if the child decides against college or drops out. But withdrawals not used for qualified education expenses are generally subject to incometaxes and a 10% penalty.

Contributions to 529 Plans qualify as “a gift” for gift tax purposes.
Therefore, a contributor may contribute up to $13,000 annually without incurring any gift tax liability, or the need to file a gift tax return. Also, a special election allows contributors to apply the annual exclusion over a 5-year election period ($13,000 X 5 years = $65,000). In this situation, $65,000 is removed from the contributor’s taxable estate if the contributor survives the five year period. Decisions around gift and estate tax consequences of 529 Plan contributions should be reviewed with your attorney and be part of your overall estate plan.

When shopping for a 529 Plan look to your own state’s plan first because the contributions may be tax deductible against state incometaxes. Unless the plan is deficient in other respects, that’s often the way to go. CT’s 529 plan is called the Connecticut Higher Education Trust (a.k.a, CHET) and the low cost provider, TIAA-CREF, is the program’s manager. Along with its low costs, TIAA-CREF has over 90 years of successful investment experience. For details about CHET, visit: In contrast, some states have broker sold plans that are usually much expensive to cover the brokers’ commissions. For example, Ohio’s broker sold Putnam Plans not only generated higher cost broker commissions, but mediocre performance as well

Limited investment choices may be another reason for consumers to look elsewhere when shopping for a 529 Plan. Also, a recent study of plans by Morningstar pointed out that some Plans have overly aggressive Age-based options. With an Age-based investment option, the plans are suppose to switch from more volatile stock investments to more stable bond investments as the student approaches college age. Never the less, some plans, such as New Jersey’s age based option investment, can still have up to 60% of its assets in equities in the years just before college, and 35% in stocks when the student’s attending college. Not a good choice when tuition bills are due and the stock market takes a dive.

For those seeking more detailed information on 529 Plans, the most comprehensive source available is Joseph Hurley’s website: Not over does this site provide answers to frequently asked questions, but it rates the various state plans, summarizes the tax rules associated with 529 Plans, helps consumers compare plans, and is just the best website on 529 Plans period.

– 10/24/2010

Filed under: Musings-Articles, Uncategorized

Rebalancing Your Portfolio: An Important, Often Overlooked Task

By: David K. Carboni, Ph.D.,CFPⓇ

The most important decision an investor can make in a long-term investment plan is deciding what percentage of his investable assets to “allocate” to each asset class. With employer retirement plans, these asset classes ordinarily include funds that invest in: cash equivalents, bonds, and stock (and sometimes, a combination of all three).

Generally, in a given economic environment, one asset class will tend to perform better or worse than the others. In the late 1970s, “cash was king,” handily outperforming stocks and bonds. From 1995 through 1999, stock market returns dwarfed cash and bonds. And from 2000 through 2002, bonds led the pack. Few (if any) prognosticators can consistently predict which asset class will lead in the future. But for the long-term investor that really doesn’t matter. Once he selects a suitable “asset allocation” (i.e., one that reflects his goals, time horizon, and risk tolerance), his task then is to make certain that his portfolio doesn’t veer too much from his chosen allocation. That’s where rebalancing comes in.

Let’s say that an investor has a prescribed long-term asset allocation of 15% Cash Equivalents, 50% Bonds, and 35% Stock. Let’s also assume that he established this allocation at the beginning of 1999, and didn’t add to nor make withdrawals from his portfolio during the year. See Row 1 in the Table Below.

Cash Equivalents

Bonds/Fixed Income Securities





10% (Year1) End Value

35% (Year1) End Value

50% (Yr1) End Value

+5% Rebalance

+15% Rebalance

-15% Rebalance




If he re-visited his Asset Allocation at the end of 1999, notice that the equity (i.e., stock) portion of his portfolio swelled to 50%, with the bond portion dropping to 35%, and cash equivalents shrinking to 10% (See Row 2 of the Table). In this situation the “casino mentality” would be to suggest doing nothing and “letting his winners ride”. However, a prudent investor would take the gains from his “winning asset class” (in this case, stock) and buy the asset class that did less well (in this case, cash and bonds) to bring him back to his original allocation (See Row 3). This process is called “rebalancing”.

When you rebalance you are really selling “your winners” and buying “your losers,” not a very appealing proposition for most people, at least in the short term. However, if you look a little closer, you’ll also recognize that rebalancing “protects you from yourself” by forcing you to “sell high” and “buy low” every year. In our illustration, who was to know that bonds would outperform stock for the next three years (2000-2002) and that the stock market would tank during that time. Those who hadn’t rebalanced would have lost a larger portion of their portfolio in the stock market downturn because the stock portion had swollen to a much larger proportion of the whole.

Rebalancing takes discipline and courage. It typically puts you in the position of liquidating investments that have performed well recently and buying investments that are may be out of favor at the moment. Think back to the investment environment at the end of 2008. The stock portion of investors’ portfolios shrank dramatically during 2008. Rebalancing would have asked investors to add to their stock market holdings (assuming they had set a valid asset allocation) just at the time when “pundits” were predicting further market losses. However, investors who did rebalance were rewarded (with the greatest annual stock market surge since World War II) in 2009. Rebalancing doesn’t always work that dramatically, but 2009’s market performance is an important reminder of the importance of rebalancing.

Experts differ on how often you should rebalance but most agree that you should do so at least once a year. Some experts also suggest rebalancing if your “asset allocation” drifts more than 10% from its prescribed allocation during the year. For investors the key is to rebalance at least annually and to have a plan in place to make it happen. For employees with a significant portion of their assets in tax-deferred accounts, rebalancing can occur without triggering any taxable capital gains. Some employees prefer to rebalance by directing their new contributions to their “under-performing” asset classes until they return to their prescribed asset allocation. Though an acceptable option, it’s easy to forget to restore where you direct new contributions once you’ve completed the rebalancing process. Again, the key is to choose a rebalancing method and stick to it.

– 10/21/2010

Filed under: Musings-Articles, Uncategorized